Financial markets do not only contain the biggest metaphors for investors. Likewise, it has the strangest irony in the form of value investing.
Ironically, in value investing, the undervalued becomes valuable for investors, which makes it instantly popular around the world. This shapes and defies the norm in the market as it becomes a strategy that is far beyond the usual. Through this, investors are able to shift from the traditional approach to this modern method of analyzing market movement.
Pleasant Contrast
To breakdown value investing, it is a strategy that involves buying the shares of companies’ stocks that are undervalued compared to their actual worth. Companies that are believed to be undervalued are those that have higher financial value but are underpriced in the market. They are firms that yield higher dividends but have a lower ratio of price-to-earnings.
Normally, investors are looking for company shares with higher prices in the stock market as they believed these stocks can sustain their long-term investment. Often times, undervalued stocks are neglected and are removed out of the radar.
These undervalued companies are not always totally undervalued. We all know that the financial market is not always 100% correct and efficient all the time, resulting to inefficiencies in the marketplace.
But through value investing, these inefficiencies turned out to be a gem of a find for investors. They buy shares of these undervalued companies so that when the market undergoes correction, the prices of these shares will surely go up.
Value investing has done wonders especially in the likes of the investment champion, Warren Buffet. The Oracle of Omaha believes that it is better to “buy a good company at a fair price” that to “buy a fair company at a fair price.”